Fed hikes rates, sees more tightening ahead

Washington — The Federal Reserve raised interest rates on Wednesday and flagged further increases in borrowing costs in the months ahead, with new US central bank chief Kevin Warsh joining a unanimous decision that effectively acknowledges the Trump administration’s inability so far to control inflation.

While President Donald Trump had promised to lower prices on his watch, the combined impact of his global import tariffs, an energy shock since the start of the US-Israeli war with Iran, and capital spending from the AI boom has kept price pressures intense enough that the Fed felt it needed to raise its benchmark overnight interest rate by a quarter of a percentage point to the 3.75%-4% range.

New policy projections show 16 of 18 policymakers anticipate at least one more 25 basis-point hike by the end of the year, with only two of them seeing rates remaining stable from here. Warsh apparently again did not submit a rate projection.

It’s the first policy shift under the new Fed chair, who took office in late May after being selected by Trump with an expectation that he would cut rates.

On the contrary, the Fed’s new policy statement and economic projections show a central bank opening the door on tighter monetary policy through next year, with the policy rate rising to the 4%-4.25% range by the end of this year and ending 2027 at the same level.

“Today’s policy action will support a timelier return to the committee’s 2% goal,” the central bank said in its policy statement after the end of a two-day meeting.

While the statement withheld any forward guidance about coming policy decisions, as is Warsh’s preference, the decision is likely to ease doubts that the Fed chief would hold off on tighter policy out of deference to Trump, a lingering question during his first months in office.

The statement dropped a previous reference attributing current elevated inflation to “supply shocks” particularly in the energy sector, a nod to concerns among policymakers, including Warsh, that price pressures were too broad for comfort.

The rate increase was announced less than two months before midterm elections that will determine whether Trump’s Republicans maintain control of Congress for the final two years of his presidency. The Republicans are facing an uphill battle with voters angry about fuel prices that are about a third higher than a year ago and interest rates on home mortgages that have been rising steadily this year. The average rate on a 30-year fixed-rate mortgage is approaching 7%.

Policymakers’ new quarterly economic projections marked up estimates of inflation, as measured by the Personal Consumption Expenditures Price Index, to 3.7% versus the 3.6% projected at the Fed’s June meeting. Inflation is not projected to return to the 2% target until 2029, a year later than previously expected.

Economic growth was marked up slightly from 2.2% to 2.3%, while the unemployment rate is seen ending the year at 4.1%, versus the 4.3% projected in June.

Warsh said in a press conference following the Fed meeting that when it came to lifting rates, “inflation remains elevated. Today’s policy action will support a timelier return to the committee’s 2% goal.”

He added: “I would be hard pressed to describe broad financial conditions as restrictive. This view was widely shared by the committee, so we removed a dose of accommodation.”

Rising bond yields are not a function of a loss in confidence in the central bank, he said.

“Instead, the rise in real-world borrowing costs is due to economic strength, surging capital expenditures that have increased the competition for capital, and geopolitical factors,” he said.

The rate hike on Wednesday was widely expected, though investors will be looking for further information from the Fed chief about what might prompt additional increases in borrowing costs.

Warsh has pledged to lower inflation back to 2% “clearly and at sufficient speed” by raising rates as needed.